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Talking To Kids About Money

OCEAN CITY — It’s an age-old parenting dilemma. When a child begins to edge into adulthood, how do you make sure he or she has the knowledge and skills needed to make smart financial decisions?

It’s critical to recognize that becoming financially independent is a journey —one that may take longer in today’s uncertain economy.

“Achieving financial autonomy is a transition rather than an abrupt change,” notes Eileen Gallo, co-author of Silver Spoon Kids: How Successful Parents Raise Responsible Children. “Early adulthood is a time of exploration, of finding out who you are. If your son or daughter is on target by 25, that’s great. But maybe that’s not to be.”

Here are some ideas for providing education about money matters and judicious financial support.

1. Share information. Affluent parents are often so concerned about their children feeling entitled that they keep them in the dark about the family’s assets. But children often learn a family’s values best by observing those principles in action, notes Stacy Allred, director, Wealth Structuring Group at Merrill Lynch. “Entitlement is a natural state we all go through in youth,” she says. “To emerge into stewardship, you need to learn about money and accountability.”

It can be helpful to ease into sharing elements of financial planning. Rather than revealing your entire investment portfolio, for example, start by reviewing a college savings account once each quarter.

2. Explain the importance of budgeting and saving. Helping a teenager or young adult create a monthly budget is a great way to instill financial discipline. “Sit down and discuss the basics of money management,” Gallo urges. “Or, if there’s resistance to your involvement—which is common at these ages—bring in your Financial Advisor. He or she can help kids create a budget, learn basic skills like paying bills online and discuss planning their financial future.”

3. Use philanthropy as a teaching tool. “You can learn important life skills—doing research, making decisions and having accountability—through philanthropy,” Allred says. She notes that for many families, philanthropic decisions are important but generally less controversial than, say, strategy decisions relating to a family business or estate investments. “So it’s a great place for siblings to learn how to make joint financial decisions.”

4. Introduce investing. Investing smaller sums with limited consequences is a great way to learn about making informed choices and managing risk, particularly in a market plagued with uncertainty. “One option is to open custodial accounts with starter funds for each child and let them work with your Financial Advisor to create a small portfolio and evaluate its performance,” Allred says. “Be sure to explain that it’s not about never making a mistake; it’s about learning from those you make.”

5. Let them falter. Whether it’s a bad investment or a splurge that busts the monthly budget, a misstep is bound to happen every so often. When one occurs, resist the urge to swoop in and rescue your child financially. “If you take away the consequences, you do your child a disservice,” Allred explains.

Every family will have its own idea about what specific assets to give the next generation, and when. But the most valuable things to give your children may well be the knowledge and skills they need to spend, save, invest and share their income responsibly.

(The writer is a senior financial advisor and can be reached at 410-213-8520.)